Discussion:1041 - Trust/Beneficiary Capital Gain Allocation

I do not prepare many Trust returns and can't seem to find a good answer for my question. Even the Help in ProSeries is tough to decipher. Any help from you all would be much appreciated.

Thank you,

OmahaGold01

The description of the business does not imply that it would "require a detailed knowledge of fiduciary taxation." I would like to know why you believe such a requirement exists? Knowing fiduciary rules and completing forms for fiduciary taxation seem very different to me, but I would respectfully like to hear your opinion.

Thank you again for the information.

That will tell you what type of trust it is. From there you will know what to distribute to the benes.

Is it a grantor trust? A complex trust? A simple trust? An irrevocable trust or a revocable trust?

READ THE TRUST DOCUMENT!

When you can answer my questions, then we will be able to answer yours.

NOW, if I (actuall the OP) am wrong and it is still Revocabele, and hence should not have a 1041 (in nost cases) the OP is in deep DOO DOO and really needs pro help.

tp

You've been asked for a profile before and you are still dispensing advice. I explained already we ask those who are giving advice to tell us something about themselves.

Two posters, Riley2 and Dennis, who posted to this question have stellar reputations on this board. You chastise us for not being friendly but yet how does a DIY'er know to rely on you for advice? We know nothing about you. You could be feeding them garbage and no one would know it. At least Riley2 and Dennis' reputations are verifiable.

Now, fill out the profile, stop chastising us and also read some of the reasons we are here. We are here for tax pros, not DIY'ers, which OmahaGold01 mentions in their profile they complete tax returns for clients, making them a tax pro.

Tom

From what I've read in the trust document - the trustee was given a HEMS power to distribute income and principal. To you, would this be an example of a trust allowing for the distribution of capital gains and/or corpus?

Thanks

1. Allocated to income per the governing instrument or local law by the fiduciary entity on its books or by notice to the beneficiary.

2. Allocated to principal and actually paid, credited, or required to be distributed to beneficaries. See Rev Ruling 68-392 and IRS Letter 8429005.

3. Used per the governing instrument or the regualr practice of the fiduciary to determine the amount required or actually distributed.

4. Realized in the termination of the trust.

5. Paid, permanently set aside, or to be used for charitable contributions generating a deduction.

Capital gains are excluded from DNI:

.................

A. To the extent the gains are allocated to principal and are not paid, credited, or required to be distributed to any beneficary during the taxable year (including charitable beneficiaries).

EXAMPLE 3. The facts are the same as in Example 1, except that

    Trustee intends to follow a regular practice of treating 
    discretionary distributions of principal as being paid from any net 
    capital gains realized by Trust during the year from the sale of 
    certain specified assets or a particular class of investments. This 
    treatment of capital gains is a reasonable exercise of Trustee's 
    discretion. 
 

Am I miss reading this, or is it the spelling of regular?

For reference Example 1 is:

EXAMPLE 1. Under the terms of Trust's governing instrument, all

    income is to be paid to A for life. Trustee is given discretionary 
    powers to invade principal for A's benefit and to deem discretionary 
    distributions to be made from capital gains realized during the year. 
    During Trust's first taxable year, Trust has $5,000 of dividend 
    income and $10,000 of capital gain from the sale of securities. 
    Pursuant to the terms of the governing instrument and applicable 
    local law, Trustee allocates the $10,000 capital gain to principal. 
    During the year, Trustee distributes to A $5,000, representing A's 
    right to trust income. In addition, Trustee distributes to A $12,000, 
    pursuant to the discretionary power to distribute principal. Trustee 
    does not exercise the discretionary power to deem the discretionary 
    distributions of principal as being paid from capital gains realized 
    during the year. Therefore, the capital gains realized during the 
    year are not included in distributable net income and the $10,000 of 
    capital gain is taxed to the trust. In future years, Trustee must 
    treat all discretionary distributions as not being made from any 
    realized capital gains. 
 

Didn't know I needed to post a more complete explanation.

"Trustee is given discretionary powers to invade principal for A's benefit and to deem discretionary distributions to be made from capital gains realized during the year.", then,

either the trust documents provide for the treatment of capital gains as being part DNI, or the trustee has discretion to include or not include captain gains in DNI.

Anyway, enough said by me.

3.

a. If the trust document provides that capital gains are to be included in DNI, or,

b. the trust documents provide that the trustee can deem discretionary distributions to be made from capital gains realized during the year, or,

c. or the trust provide that the the trustee can deem distributions to be from capital gains realized during the year, then, if the trustee intends to follow a regular practice of treating discretionary distributions of principal as being paid from any net capital gains realized by Trust during the year from the sale of certain specified assets or a particular class of investments the trustee may do so.

I know of a revocable trust where the atty wrongly got an EIN for the client!

A complex trust is permitted to distribute income and princ to the bene. Cap gains are considered part of the princ. Cap losses can NOT be distributed to the bene.

If the entire cap gain was distributed, then give the amt to the bene. If only half the cap gain was distributed, then the trust has 1/2 and the bene has 1/2. The trust would pay tax on its share of the cap gain retained in it. etc etc ...